Hi,
I'm Bruce Traan, Cboe's head of Global Index Services.
Welcome to Cboe's global index spotlight.
I'm joined by the CEO of Vest, Karan Sood.
We're here to discuss the Target Outcome Indexes.
Karan, could you provide the genesis of where Target
Outcome Indexes came from?
Yes.
First of all, thank you, Bruce, for having me appear.
It's a really exciting event. Yes,
Target Outcome Investment is
a term we coined about four years ago,
and it's come a long way.
It's becoming more and more talked about
and becoming more mainstream.
We have a lot more product after the first few products
that we launched, not just by us by other firms.
So it's super exciting.
So really the key aspect that we're
trying to bring to fore with Target Outcome Investments
is to develop investments which deliver
a specific outcome, which has a high degree of certainty to it.
And just to contextualize it, conventional investments,
equity investments, bond investments,
putting them together, like 60-40 investments,
there is a broad acknowledgment that these investments,
and market in general, has a high degree of uncertainty
to it, right?
So it can go through times where equities
will show very low risk and very good performance,
but then you'll have a few months where you'll
have acute amount of risk and really high underperformance,
and similar with fixed income, and similar with a 60-40
balanced portfolio.
Like if the risk measures can move around a lot,
performance measures can move around.
For a lot of investors, that's painful, right?
And so we think there is utility for investors in investments
which mitigate uncertainty.
And one of the tools to deliver that,
which is sort of underappreciated
in sort of the more broad market but heavily used
in the institutional market, is the utilization of options.
And options are these contracts--
because they are contracts which say if x happens--
if S&P goes below a certain level, as an example,
then we'll give you this kind of a payout, right?
That contractual certainty allows
you to build these targeted outcomes, which
then give a very high degree of certainty.
It's almost like taking that uncertainty of an equity
market, but putting guardrails around it using options
to deliver this high degree of targetedness, right?
To your question about the genesis,
these kind of investments are not completely new.
They've existed for a couple of decades
now, like notes or annuities.
And the common theme across both those kind of products
is that they are manufactured by companies
which have a balance sheet.
And the companies would provide this sort
of the strength of the balance sheet
to provide that certainty, almost like a guarantee.
But with those investments, what most of these companies
are doing is that they're hedging the risks that
results from providing those guarantees in the options
market.
So the thinking we had four years ago
when we pioneered this space, was to take those options,
put them into a registered product, like a fund or a UIT,
and then offer units of that, or shares of that,
to the investors.
And by doing that, now suddenly, you open up this space
for all those investors who like to consume investments
in a more registered manner.
And, you know, it was not trivial.
A lot of us at Vest come from the background
of having worked at banks, manufacturing these as notes,
or working at insurance companies
and manufacturing these as insurance contracts.
And the most logical thing to do is
to take that same over-the-counter options
that these firms were using for hedging their risk
and try to put those into a registered wrapper.
And I think what you run into is the registered
wrappers, like a mutual fund or a '40 Act fund
has high governance.
And the over-the-counter options don't meet that governance
standards, right?
And so then we thought, hey, we should use listed options.
And what you run into with standardized listed options
is this challenge that standardized listed options are
only available in certain strikes
and certain maturities, whereas the marketplace has come
to expect through these notes and annuities
a high degree of certainty that I'm going to be protected from,
let's say, 0% to 10% exact.
And I want my investment to last one year exact, right?
And that's very hard with standardized listed options.
And so as we were thinking about this,
we came across the FLEX option space,
and the amazing innovation that Cboe has done in that space
by pioneering FLEX options.
And really, I remember reading this blog post
by Matt McFarland of Cboe and he wrote
about how you could use FLEX options to construct
these targeted outcomes.
And just, like, bang, the light bulb went off.
Like, you could put these FLEX options into these registered
wrappers, meets the high governance standards,
and then available to a very broad spectrum of investors,
as opposed to sort of the more institutional investors who
were getting access to these wrappers, right?
And so we pioneered that.
We filed for the first ever registered product
which used FLEX options for targeted outcomes as UIT first.
And then we did it as mutual funds.
Two years ago we launched the first ever '40 Act
funds that provided access to target outcomes.
And, you know, we're going to do this with ETFs.
We already do this for SMAs.
So long answer to your question of what the genesis is.
Fantastic.
I mean, you provide a great depth and color
on sort of the evolution of these Target Outcome Indexes.
So if you want to learn more about Target Outcome Indexes,
please visit Cboe.com/index for more information.